Investing

Tips, strategies, failures, success and more in investing.

Five Basic Investment Mistakes to Avoid in 2015 so you’ll be on your way to making money in 2015!

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If you’ve been reading some of my past basic investment mistakes, which I’m detailing in the investing section, you’ll know that I’ve made a ton of silly decisions over the years, but here is my list of things to remember.

My Top 5 Basic Investment Mistakes

After all, investing is a tricky and uncertain affair if you’ve never bought stocks or shares before; so here are five basic investment mistakes you can easily avoid:

1. Buying a Stock on a Friend’s Tip

You’re at work or on a stock board, and you come across a tip that such and such a stock is going to bounce by 10% or 20% or 100%. Perhaps you find an email that recommends you purchase a penny stock! Don’t. Just don’t.

You need to do your own research, read about the company’s products & services, and have a look at the numbers yourself. I can’t stress this enough, because even reputable analysts get it wrong. Few would have predicted the demise of companies like Nokia, Motorola, or RIM ten years ago. Only a RIM remains now.

If you’d taken a punt on RIM, because of the launch of the Storm, you’d be seriously under water now. Nokia has been a rollercoaster since the 00’s, and Motorola is no longer in the handset business.

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Do your own research, be objective and decide for yourself. Otherwise you’ll be on the rollercoaster ride!

2. Not Keeping Good Records

It’s not as difficult as it used to be to keep records, many online brokers keep records of trades for years in your account. So you can track down more easily what you paid, when you purchased, and how much stock you actually bought.

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However, with online document creation services, like Google Docs, Microsoft’s Office, you can easily create a personal record of each transaction, add dividends, etc. If you can use Excel, then you’re pretty much good to go. Even a pencil & paper will do.

3. Paying Too Much When Buying

The biggest enemy of profit or driver of loss: paying too much when you purchase. Your profits are determined by your entry price more than your exit price, so watch what you pay. Warren Buffett recommends this, too.

If’d bought some of these stocks in 00’s, I’d have paid way over the odds. I’d certainly have to consider buying them now VERY carefully. The trouble with consumer-side investing is that we don’t have the advantages that Buffett has to seal inside deals with generous terms. We don’t.

Let’s give you an example: suppose you buy Microsoft at $20 per share and you sell at $30, your gross profit is approaching 50%. Not bad, eh? But if you had bought it at $25 per share, your profit margin would be only 20%! Of course, if you’d borrowed to buy the stocks, the difference would be even starker.

The only way we can control the profit margin is by watching what we pay at the outset. It doesn’t have to be the lowest price possible, but you should avoid those high price days.

4. Forgetting Dividends Matter

Dividends do matter. A lot. In fact, they can mean the difference between overall profit or loss. In some stocks I’ve purchased, the profits came from the regular & increasing dividends that were paid; while the purchase price remained the same.

In 3M’s case, they made up 2/3rds of my gain in value. That’s something that you need to consider. Ignoring dividends, like I did in 1998, is a costly mistake.

Lots of companies pay dividends, though tech or internet companies may not. In fact, if the companies aren’t making money, dividends are impossible.

5. Not Running a Profit

I’d put a big black cross these days against companies not running a profit. It’s one thing to not run some kind of profit in the first couple of years. Most startups do this. But after year 5, a company should really be profitable, not just showing a plan for creating profits years from year 5.

While gargantuan profits are rare in many industries, do look for real profits not just share price increase. At some point, the share price will come to reflect the actual money that the company makes. If the margin in profits is too slim or too far away, investors can turn cold quicker than a lasagne in a blast freezer and leave you nursing losses that are hard to claw back.

Sky high PE ratios can be an indicator that profits are slim; or the company profits prospects are limited. Such PE ratios can fall back to earth rather quickly. I can think of several companies right now with high stock prices and growth expectations, but very very slim profitability margins (*cough* Amazon, current P/E is not available because it’s losing 88c per share.

Investing for Beginners: Take it One Step at a Time

Any good beginner investor knows that company research is the first step to take if you want to avoid making any of these basic investment mistakes.

You really need to  spend time thinking about the company as a business, deciding what to buy & when to buy. Don’t forget to have an exit strategy, too.

Then spend time reviewing a good investment guide. That is the next step. There are some really great investment guides and professional advice waiting for beginners.

Developing your patience and persistence to invest successfully is simply the most useful & successful strategy you will ever have in your arsenal.

3 Top Reasons to Use Online Stock Brokers

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Online trading has exploded over the past couple of decades, since the beginning of companies like Datek Online (remember them?). Its popularity was made by the ease of use, cost of trades, and increasing number of platforms on which you could trade.

There are many other reasons why so many people are doing it, but let’s check out what I think are the top 3 reasons.

Better level of control for commissions, trade executions and transparent pricing

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Image of TDAmeritrade’s Online Platform

One of the key things that caused many people to go the online route was that the commissions for brokers were already through the roof. The lower level of commission also made smaller trades, micro-accounts and more frequent trading possible, meaning that ordinary people could access the market directly for purchasing stocks, bonds, contracts & much more.

Instead of calling your broker, you could open your browser or start up your trading apps to get the best current pricing; decide on whether you want to go long or short; and set the market, limit or stop limit orders for the stock you wanted to purchase, allowing you to dictate your execution pricing and your total purchase/sell cost.

A better level of control effectively means that you will have more control over your profits or losses. This new trading phenomenon wound up working for many people, and encouraging dozens of online trading companies to spring up seemingly overnight.

Accessibility to your trading accounts 24/7/365

I’m not a frequent or avid trader by any means, but even I enjoy those advantages of being able to access the account pretty much where, when and how I want. If I had to rely on a standard broker, who may be unavailable when I decide to call, to buy and sell everything for me, there would be a limit to how quickly I can make an investment. In the financial world, time is money and every second counts.

So, if you trade online, you will make all of the trades yourself. You can do everything at the exact second you want to. Even the smallest delay in buying or selling can cost you a very large amount of money. But you will need to learn about online trading from someplace like Online Trading Academy, you will never lose money because your broker was unreachable at the time you wanted to make a trade.

Most modern brokers offer a variety of platforms to access your accounts: web-based sites, apps on your phone or pads, even proper software for your PC or Mac. And you will still be able to dial-in on the old phone, and make trades for an extra fee.

Look for a good online stock broker

Really, check out the offerings and decide what you want or need. You will need to decide what products you want to trade: stocks, bonds, forex, contracts, commodities, etc.; then consider what kind of tools you actually need: will you be trading via web or app or via a full software application.

Lastly, don’t forget to look at the additional research brokers these days offer. Many offer lots of research tools, reports, stock scanners, and much more for no additional fee; while others charge bare-bones fees for stock trades, then have an a-la-carte attitude to the many services available, so trading costs will be low until you need to pay for additional services. However, most fees are minimal compared to what you would pay to an actual traditional broker.

Check out this video for more information. And search through this site for more ideas on use online stock brokers for trading. Or perhaps you have a favorite you’d like to share.

The Virgin’s Lessons in Buying Stocks like it’s 1998 – 5 Lessons You Need to Know

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So what did we learn? Doing this post, I’m afraid I’m just going to use Excel screenshots, rather than copying & pasting all those numbers. There really is too much room for errors!

Lesson #1

Picking a basket of reasonable stocks is a sound idea, esp. if you are picking from a quality grouping. It doesn’t protect you from the inevitable fall from grace that occurs from time to time; but perhaps the slack will be picked up by the others in the group. Who knows, you may even pick a star. In 1999, nobody would have predicted GM’s demise; car sales were booming, and profits were increasing.

Lesson #2

I chose these four stocks because they were relatively undervalued to their peers at the time, and their dividend rate suggested that the price was undervalued. Because I only owned them for about 12 months, I didn’t manage to get the full benefit of rising dividends, increasing value, I short-changed myself. Remember this is the time of the Dot Com Bubble/Crash, 2 Wars, 9/11… it hasn’t been an easy decade for the stock market. I could have bought some of these stocks at bargain basement prices later on, too.

Lesson #3

People say that investing & holding is dead. This doesn’t show that at all. If you’d held all these stocks; and only looked at them once in 10 years, you’d be pinching yourself if it was 2014 or you’d be kicking yourself if it was 2009. The prices that Mr. Market bids year to year can vary widely. It does however, suggest that you need to be careful about your timing. Or at least the excesses of buying and selling that can occur.

Lesson #4

Don’t pay too much; Warren Buffett’s real teachings. Just don’t overpay. Your profits are determined by your entry price more than your exit price, so watch what you pay. If’d bought these stocks in 1999, I’d have paid way over the odds. I’d certainly have to consider buying them now VERY carefully. The trouble with consumer-side investing is that we don’t have the advantages that Buffett has to seal inside deals with generous terms. We don’t.

The only way we can control the profit margin is by watching what we pay at the outset. It doesn’t have to be the lowest price possible, but you should avoid those high price days, if you can.

Lesson #5

Dividends do matter. A lot. In fact, they can mean the difference between overall profit or loss. And in 3M’s case, they made up 2/3rds of the gain in value. That’s something that you need to consider. Ignoring dividends, like I did in 1998, is a huge mistake, and a costly one.

Bonus Lesson #6

In fact, in 1999, I had to sell these stocks to pay for a house purchase down payment. We were short of cash and I was glad that I could sell the stocks to cover the payment, even at the modest gain I made. I don’t know if I hadn’t sold them how my investments in 1999 would have gone otherwise. But the upside was we got a house to live that we could call (almost) our own.

My horizon wasn’t long enough, however. If I had known that we needed to buy a house so soon, I’d have avoided the currency exchange rate risk, and kept the money in the bank. Many advisors suggest a 3- or 5-year horizon as a reasonable timescale. Of course, that would have ended in the troubled markets of 2001.

And I shouldn’t have re-entered the market at that point. But I did. Silly me.